Google has said it wants to increase its operating income every single quarter, and the Internet search group routinely does. But it didn’t in the second quarter. Google says this is due to temporary problems caused by the seasonal nature of ad spending and by its own fast growth. But problems in the search market might be broader.
At first glance, everything looks fine. Revenues rose 6% over the first quarter of the year. Most companies would kill for that sort of growth. But margins were more troublesome. Operating earnings fell 7% sequentially as the company hired more workers and paid existing workers bigger bonuses.
This is odd. Google should be doing far better, considering the disarray at its main competitor, Yahoo. It has consistently stolen that company’s market share in search. Indeed, about half of all searches in the US are now done using Google. But perhaps the overall search market’s growth has slowed. If so, that could point to more tepid conditions in advertising or, worse, to price competition and lower margins.
That said, it’s far too early to think Google is on an inexorable downward spiral—just look at all the digital material that can’t be efficiently searched. Co-founder Sergei Brin waxed poetic on the company’s earnings call about the ability to find great IBM videos from the 1960s online. This probably isn’t what most readers are looking for, but that’s the point. The best way to light another rocket under the group would be to master a new market, such as video search.